Comprehensive Medicare Reform

by John Goodman
Issue 212– September 26, 2012

In contrast to the proposals put forward by left-of-center policy analysts, a group of right-of-center economists, also writing in theNew England Journal of Medicine (NEJM), are proposing two ideas with merit:

* Give Medicare enrollees the opportunity to enroll in private health plans, with the government paying a fixed sum of money toward the premium.

* Replace the current system of tax subsidies for private health insurance for the working age population with a lump sum, refundable tax credit and make it available regardless of where the insurance is purchased — at work, in the marketplace or in a health insurance exchange.

* Both proposals would convert the open ended subsidies of the current system into a defined contribution approach. The federal government would pledge a fixed sum of money to individuals for private insurance. Individual choice and the marketplace, however, would determine what kind of coverage people acquire.

The Medicare proposal builds on the Medicare Advantage program that is already in place and which has allowed one of every four beneficiaries to have the same kind of insurance many non-elderly people have. The government’s contribution to these beneficiaries is risk adjusted, so that more money is committed to those with higher expected health care costs. Under the reformed system, however, plans would have far more freedom to offer seniors a wider variety of coverage options than they now have.

These proposals are put forward by Joe Antos, Mark Pauly and Gail Wilensky. They are good ideas. In fact I cannot imagine any serious health reform that didn’t do these two things. However, they don’t go far enough.

Any time radical reforms are proposed, they face the potential objection that they are not politically realistic. So let’s start there. I believe you can take benefits away from people and shift more of the burden from taxpayers to beneficiaries. But that shift is a hundred times easier if you give the beneficiaries new tools to handle the new burdens they will have to bear.

Take young people. I believe you can tell 45 year olds that they are not going to get as good a deal from Medicare as we previously promised. But there should be a quid pro quo. They should be allowed to deposit funds into a tax-favored account over the next 20 years to help them save for the added burden they will face. (Here is a full blown proposal for doing that.) Similarly, I think those who remain in traditional Medicare would accept a higher deductible in return for catastrophic coverage — thereby removing the need for Medigap insurance. But seniors need to be able to self-insure for the deductible amount in a savings account, just as non-seniors can currently do.

I would go further. Tom Saving and I proposed some changes to Medicare — all designed to empower patients and let the marketplace, rather than Medicare, determine the price of care. For example, we proposed to allow Medicare beneficiaries to add to Medicare’s fee and pay the market price at walk-in clinics and other commercial outlets where prices are clearly market prices, rather than artifacts dictated by the third-party-payer system. Since the alternatives to walk-in clinics are all more expensive, this change would not only expand options for seniors, it would probably save taxpayers money at the same time.

We also proposed allowing seniors to pay higher fees for primary care — say, in return for reduced waiting and other amenities — and even allowing Medicare to pay part of the fee for those who opt for concierge doctor services. Each of these proposals involves seniors paying more out-of-pocket. But they also involve allowing patients to get more timely care and perhaps better care.

Now let’s turn to the broader issue. There are basically two types of insurance: third-party insurance and individual self-insurance, say through a Health Savings Account. If you insists on constraining the former (by limiting its ability to price risk), more of the cost-reducing work must be done by the latter. If you insist on weakening the former, you must strengthen the latter. Fortunately, there is a lot of evidence that individual self-insurance is up to the challenge.

Health markets have been found to work well — in fact, very well — wherever the market is dominated by patients spending their own money: cosmetic surgery, Lasik surgery,online mail order drugs, walk-in clinics, telephone and email consultation services, concierge doctor services, the international market for medical tourism and the domestic market for medical tourism.

Wherever providers must compete for patients spending their own funds, we find transparent prices, package prices, price competition and quality competition. Remarkably, we find the real price falling for well over a decade in cosmetic and Lasik surgery, despite a huge increase in demand and all sorts of technological change (of the type that is said to increase costs for every other type of surgery!).

So why have our conservative friends overlooked this point? Ironically, Mark Pauly (with yours truly) actually worked out the ideal mechanism for combining individual self-insurance with a fixed sum refundable tax credit: it’s what we today would call a Roth Heath Savings Account.

Here is another irony: the left-of-center proposals seem to better reflect an understanding of the need for a greater role for self-insurance than those on the right. Their proposal, for example, calls for tiered third-party insurance, under which patients would pay more out-of-pocket for more expensive drugs and procedures. Unfortunately, it doesn’t dawn on them that generous HSAs will be needed in order for this option to work well.

Before giving up on third-party insurance’s ability to control costs, however, why not consider fundamental reform in this area as well. Under the two policy ideas we began considering, premium support for the elderly would be risk adjusted, as noted. This means that when a senior with an expensive health problem switches health plans, the new plan receives a premium support payment from the government reflecting the enrollee’s higher-than-average health care costs.

The tax credit offered to non-seniors would not be risk-adjusted, however. This means that non-seniors need a way to protect themselves against the economic consequences of switching health plans in case they develop an expensive-to-treat, pre-existing condition. The conventional solution is to require the new health plan to accept the enrollee at a community rated premium, regardless of expected costs. But this assures that the new plan has no interest in satisfying the new enrollee or in meeting her needs. Mark Pauly in particular has proposed change of health status insurance in these cases. So has John Cochrane. And so have I.

Allowing people to insure against the future costs of a pre-existing condition should be part of any right-of-center health reform plan.

John Goodman is President and CEO/Kellye Wright Fellow at the National Center for Policy Analysis.